India’s Central Bank Renews Push to Keep Crypto Out of the Financial System

The Reserve Bank of India (RBI), the country’s central bank, has reiterated its support for a cryptocurrency policy that favors a prohibition-oriented approach.

The RBI wants banks and financial institutions barred from any exposure to crypto assets and privately issued stablecoins.  

Why India’s Central Bank Leans Toward Crypto Prohibition

The RBI has warned about crypto risks repeatedly and now argues for policies “leaning towards prohibition,” according to documents reviewed this week by Reuters. It wants digital assets kept outside the regulated financial system. Officials say the aim is to limit contagion risks to lenders.

The stance revives a fight the RBI lost in 2018, when a court struck down policies that had effectively banned crypto dealings. Since then, digital assets have existed in a grey zone.

Indian banks are currently allowed to engage with cryptocurrencies. However, most major lenders have stayed away from the sector after repeated cautionary statements from the RBI. 

The containment line echoes caution seen across global frameworks, though most now favor regulation over isolation.

Government figures put the number of crypto traders at nearly 39 million. They held about $2.1 billion in digital assets at the end of May, according to the tax department estimates.

Follow us on X to get the latest news as it happens

Stablecoins and Offshore Trading Raise the Stakes

The RBI extended its warning to stablecoins, tokens pegged to fiat currencies. It said foreign-currency versions threaten monetary sovereignty. Rupee-backed tokens could cut the government’s currency income and strain stability during market stress.

It added that permitting stablecoins could make it harder to identify and tax cryptocurrency profits, as users would have less need to convert their holdings into fiat currencies.

Moreover, the tax department flagged offshore exchanges and private wallets as issues for tracking. Those channels make it harder to identify beneficial owners. Peer-to-peer trades in rupees also make taxable income difficult to trace.

Compliance already lags. Fewer than a quarter of the 645,000 people who traded crypto in the year ending March 2023 reported it on tax returns. India taxes crypto gains at 30% and levies a 1% tax on each trade.

The coming months will show whether the government turns the RBI’s prohibition lean into law or keeps crypto in limbo.

Subscribe to our YouTube channel to watch leaders and journalists provide expert insights